In today's business environment, large companies are faced with the challenge of measuring their budgets and making economic decisions based on various dynamic economic factors. In such circumstances, for a company, measuring the budget involves forecasting and estimating the levels of interest rates, foreign exchange rates, commodities prices, and other financial variables over the course of several accounting periods. For example, a U.S. based company may have subsidiaries in England and Japan. While the company may have certain expectations regarding revenues from each of the subsidiaries, changes in the exchange rates of those countries, with respect to the U.S., can add uncertainty into the company's budget forecasts, and thus, add budgetary financial market risk.
Thus, in making budgetary forecasts, there can be considerable uncertainty around these budgeted levels, which can have a large negative impact on the realized budget. In turn, any financial market risk in the treasury budget directly impacts corporate earnings financial market risk. Thus, the financial market risk in the treasury budget needs to be measured and managed. Present methods of measuring and managing a treasury budget, however, have certain deficiencies. Present methods of measuring and managing a treasury budget can result in an overly high estimate of financial market risks. In addition, present methods of managing financial market risk in a treasury budget can include the creation of separate hedges to separately mitigate financial market risk for each of a number of financial market risk factors. Such creation of separate hedges tends to be relatively expensive. Also, when the separate hedges are taken together in aggregate, in certain circumstances, the cumulative effect of the separate hedges may be contradictory.
Further, present methods of managing the financial market risk in a budget typically result in an overestimation of the financial market risk in the budget, and consequently, over hedging. In addition, the hedges pursued are often more expensive than is necessary to achieve an acceptable level of financial market risk reduction, which involves reducing the level of financial market risk to an acceptable amount.
Thus, there is a need for an improved system and method for evaluating and managing financial market risk.